Is Bitcoin A Hedge Against Central Banking? Evidence from AI-Driven Monetary Policy Expectations

TL;DR

This paper shows that Bitcoin prices respond to central bank signaling, especially hawkish narratives, and introduces a novel LLM-based index to predict Bitcoin movements based on monetary policy expectations.

Contribution

It develops a high-frequency MPE index using LLMs and combines LSTM and SHAP to analyze Bitcoin's sensitivity to monetary policy narratives.

Findings

Bitcoin reacts negatively to hawkish central bank signals.

The MPE index Granger-causes Bitcoin returns at short-to-medium horizons.

Non-linear macroeconomic interactions are revealed through LSTM-SHAP analysis.

Abstract

This study investigates the transmission of monetary policy narratives to Bitcoin prices, distinguishing the impact of ex-ante expectations from ex-post interest rate implementation. We introduce a high-frequency Monetary Policy Expectations (MPE) index, using a Large Language Model (LLM)-based classification of 118,000+ market messages to achieve a precise hawkish/dovish decomposition. Results from a framework combining Long Short-Term Memory (LSTM) networks with SHapley Additive exPlanations (SHAP) indicate that Bitcoin functions as a sensitive barometer of central bank signaling; specifically, hawkish narratives consistently trigger negative price responses independently of actual Federal Funds Rate adjustments. We demonstrate that the MPE index Granger-causes Bitcoin returns at short-to-medium horizons, establishing linear predictive causality, while the LSTM-SHAP framework reveals pronounced non-linear, macroeconomic regime-dependent interactions. These findings highlight Bitcoin's structural sensitivity to global monetary discourse, establishing LLM-derived sentiment as a potent leading macroeconomic indicator for the digital asset landscape.